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Fitch Ratings on Chinese property developers’ liquidity, debt crisis


A man walks in front of unfinished residential buildings at Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China September 15, 2021. Photo taken September 15, 2021.

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Home sales fell sharply along with homebuyer confidence. Home sales by value fell 16.31% year over year in November, a fifth month of decline. New home prices fell 0.3 percent month-on-month, the biggest drop since February 2015, according to Reuters.

In a dire scenario of a 30% drop in residential sales, 12 or about a third of the 40 assessed developers could go into negative cash flow, Fitch said in its report. In Fitch’s base case – a less severe scenario – a 15% drop in home sales could result in about 13% of its rated developers running into a cash deficit.

Chinese developers faced $19.8 billion in bonds maturing overseas, denominated in U.S. dollars in the first quarter and $18.5 billion in the second, Nomura analysts estimate. in a recent note. That first-quarter amount was nearly double the $10.2 billion due in the fourth quarter, analysts said.

In the coming year, real estate developers could face an even higher number of bonds maturing.

Specifically, developers rated “B” or below will face increasing pressure to repay foreign debt, with foreign bonds maturing or transferring in 2022 with principal amounts up to term higher than in 2021, Fitch said. A transferable bond allows their holder to force the issuer to redeem the bond before maturity.

A “B” rating means there is a serious risk of default, but a limited margin of safety remains.

Contingent debt exacerbates liquidity stress

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The emergence of ‘hidden private debt’ creates liquidity strains, especially for undervalued developers with upcoming bond maturities, Fitch said in a report last week. large,” Fitch said in last week’s report.

According to Fitch, such hidden debt would include undisclosed debt and guarantees for loans from joint ventures, associates and other third parties that enable developers to bypass the limit. China’s “three red lines” debt.

That policy places a limit on debt in relation to a company’s cash flow, assets, and capital levels, and is intended to rein in developers after years of growth fueled by excessive debt.

Developer problems may soon reach

Looking ahead, analysts do not expect the market conditions that have plagued developers to ease until sometime next year.

Guangzhou Evergrande football stadium under construction in Guangzhou, Guangdong province of China on September 17, 2021

STR | AFP | beautiful pictures

Monica Hsiao, founder and chief investment officer at Triada Capital, said she expected to see a “bottom” for China’s high-yield bonds, essentially real estate bonds, in the second half. early next year.

“Because the market is really waiting to see if the government’s tolerance threshold for policy easing is more material, and many markets believe it will come in the first quarter,” she told CNBC. “Street Signs Asia” on Friday.

Earlier this month, investor sentiment in the real estate sector improved as China’s monetary policy tended to ease. The central bank has cut the required reserve ratio, or the amount of cash banks must hold as reserves, for the second time this year – freeing up 1.2 trillion yuan ($282 billion) to boost the economy.

Fitch added that the operating environment for Chinese developers will remain challenging and that a “meaningful recovery in capital and market access conditions” won’t arrive until the second half of 2022. .

– Evelyn Cheng of CNBC contributed to this report.

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